Wednesday 22 April 2020 1:44 pm

Law and accountancy firm coronavirus partner promotions: a poisoned chalice?

Law and accountancy firms have promoted swathes of new partners in recent days with many firms hailing the strong rounds as a signal of confidence in the future.

But with new partners typically required to stump up £50,000 to £100,000 to join partnerships, it is a potentially risky step up for the individual during the current crisis, but a boon for the firm which gets a fresh injection of capital.

Partner promotions rounds at top law firms have been noticeably strong this year.

In recent days Eversheds Sutherland promoted 38 lawyers to partner across its non-US business – its highest total since its 2017 merger, Herbert Smith Freehills promoted 26 new partners – its largest round since its 2012 merger, Linklaters promoted 30 new partners – its second-largest round in a decade and Allen & Overy today promoted 29 lawyers to its partnership ranks.

Accountancy firm RSM this month also added 10 new partners to its partnership.

While firms have generally presented the strong promotions rounds as a reflection of their confidence in the future – new partners also bring fresh capital into the business, helpful at a time when many firms are taking measures to preserve cash by cutting or delaying partner profit share.

“It strikes me that now is a good time to promote junior partners- get them into the partner capital loan scheme and they borrow within the scheme so it recapitalises the firm… it it a cost efficient point in time to promote a whole bunch of new partners,” one source said.

Another source said: “Firms will be desperate for partner capital loans, it helps their covenant strength.”

The partner promotions may have been long planned, reflecting a strong 2020 for most firms in the sector, but the new partner capital will be welcome nevertheless.

New partners are required to buy their way into the partnership with a capital contribution which can range from £50,000 to £100,000.

Typically a firm will have an existing partner capital loan arrangement with a bank with an agreed credit limit.

New partners coming in will be added to this scheme with leaving partners dropping off.

New partners borrow from the bank and lend to the firm to fund its working capital. They typically receive this capital back after they leave the firm or retire.

However, If the firm goes under, partners – who rank as unsecured creditors – are unlikely to get much of their cash back while remaining personally liable to the bank for the debt.

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John Lord, a litigation partner at law firm Knights, said: “If an LLP [limited liability partnership] fell over tomorrow do I expect the banks to be pushing for their money the next day? The next week? The next month? Not necessarily, but in six-to-seven months’ time when it wouldn’t be viewed as callous to pursue those monies I expect that they would.

“It’s a liability. The partner borrowed the money from the bank and then loaned the money to the LLP, and if the LLP can’t repay the partner, that is an issue for the partner, it has nothing to do with the bank.”

For the newly created partners, the deal is a good one if their firm rides out the present crisis.

Partnership is typically the target of most junior lawyers and accountants, giving a share in the firm’s profits and the opportunity to build their own book of business.

But in the event of a failure, the partnership class of 2020 could be left with an unpleasant debt to service and no income.

One law firm partner said: “It is a good trade if the firm survives, but a crappy one if it goes under.”